Volkswagen Quarterly Profit Quadruples on China, U.S.

Volkswagen AG chief executive officer Martin Winterkorn,. Photographer: Michele Tantussi/Bloomberg

Volkswagen AG, Europe’s largest carmaker, reported the biggest quarterly profit in two years on higher demand in China for the namesake brand’s Jetta and Lavida and the Audi luxury unit’s A6.

Second-quarter operating profit in China, VW’s largest market since 2009, more than doubled to 518 million euros ($677 million) from 193 million euros a year earlier, according to figures released by the Wolfsburg, Germany-based company today. Group net income in the period quadrupled to 1.25 billion euros.

Chief Executive Officer Martin Winterkorn needs China to help achieve his goal of surpassing Toyota Motor Corp. in sales and profitability by 2018. The CEO in the last two months announced plans to build two new plants in China, the world’s biggest automobile market, to double production capacity.

“China has become hugely important for VW’s business targets,” said Frank Biller, a Stuttgart-based analyst with Landesbank Baden-Wuerttemberg who recommends buying the stock. “The margin per car is clearly in the double-digit range.”

Volkswagen’s preferred shares rose as much as 3.16 euros, or 4 percent, to 81.75 euros and were up 2.5 percent to 80.55 euros as of 4:39 p.m. in Frankfurt trading. The stock has gained 23 percent in 2010, valuing the carmaker at 35.1 billion euros.

Second-quarter net income beat the 721 million-euro median estimate of nine analysts surveyed by Bloomberg News. Earnings before interest and tax more than doubled to 1.99 billion euros as revenue rose 22 percent to 33.2 billion euros.

China Reliance

Volkswagen, the first overseas carmaker to enter the Chinese market three decades ago, is counting on the country to offset stagnating sales in Europe, where the end of government scrapping incentives is hitting demand for vehicles. First-half industrywide sales in Europe rose 0.6 percent. Deliveries of passenger cars in China in the period soared 48 percent.

Revenue and operating profit this year will be “significantly higher’ than in 2009, Volkswagen said today, as China boosts the carmaker to record deliveries in 2010. VW’s first-half China sales advanced 46 percent to 950,729 vehicles, accounting for 26 percent of deliveries worldwide.

“We’re operating right at the edge of capacity utilization and have to add capacities as quickly as possible to maintain our position,” Chief Financial Officer Hans Dieter Poetsch said today on a conference call, citing demand for the Golf compact, VW’s best-selling model, and the Tiguan SUV.

‘Unbelievably Fast’

“China is developing unbelievably fast,” he said. There’s a risk “of a smart, soft cooling down” of the Chinese economy in the second half, he said.

Rival PSA Peugeot Citroen, Europe’s second-largest carmaker, said yesterday its auto unit may lose money in the second half as demand in Europe, which accounts for two-thirds of sales, slumps. The European market will shrink 7 percent for the full year, the carmaker said. Helped by a second Chinese joint venture announced this month, the Peugeot aims to generate half its sales outside Europe by 2015.

As Volkswagen’s reliance on China increases, the risk for the carmaker rises should the market slow down. China’s car sales in June advanced 19 percent, the slowest pace in 15 months, the China Association of Automobile Manufacturers said July 9. Auto dealers’ inventories have risen due to a quickening inflation rate, which rose to an annual 3.1 percent in May.

Slowdown Opportunities

“A slowdown in China seems negative for VW on first glance though it actually entails opportunities for future business,” said Horst Schneider, a Dusseldorf-based analyst at HSBC Holdings Plc who has an “overweight” recommendation on the stock. “Chinese carmakers may suffer the most from any deterioration of the domestic market, that creates chances for VW and other foreign rivals to gain market share.”

Volkswagen’s two new Chinese factories will bring the carmaker’s total in its biggest market to 11 as VW doubles production in China to 3 million vehicles within four years from 1.4 million in 2009. VW in investing 6 billion euros in the country to fund the expansion and add new models.

Winterkorn is targeting a pretax profit in 2018 that exceeds 8 percent of sales, compared with 1.4 percent in the first three quarters of 2009, as well as a medium-term operating margin of at least 5 percent of revenue.

“A market that absorbs about a fourth of VW’s deliveries is absolutely indispensable if VW wants to surpass Toyota,” Biller said. “Without sustained growth in China, this plan will simply not be feasible.”

New China Chief

The carmaker two months ago named Karl-Thomas Neumann, head of the company’s electric-car division, to take over the Chinese operations beginning in September from Winfried Vahland, who will run the Skoda brand. VW reported increasing profits in China in the last five years under Vahland, who reversed the losses and falling market share plaguing the operations when he took the helm in 2005.

Neumann will need to update aging models and create more cars designed for Chinese consumers to build on Vahland’s success, analysts said.

“Their solid base in China, good reputation and ability to tailor cars to Chinese buyers’ needs have propelled VW’s success in that market,” said Tim Schuldt, a Frankfurt-based analyst at Equinet AG who recommends buying the stock. “All told, I see no acute need for change.”

To contact the reporters on this story: Andreas Cremer in Berlin at acremer@bloomberg.net.